The Dow Jones Industrial Average (DJIA) closed down 1,465 points Wednesday, which pushes it into an official bear market.
A bear market is defined as a drop of more than 20% from the highs. While 20% is an arbitrary percentage, it makes it easier to define the environment and makes it clear that this is not a good market.
The DJIA is often not very representative of the broader market and that is the case again here. The Russell 2000 ETF (IWM) is already down more than 25% and only about 9% of all stocks are over their 200-day simple moving averages. That is a remarkable statistic and has only been surpassed in 2009 and in December 2018.
What is most remarkable about the current market isn’t just the decline but the speed at which it occurred. The DJIA has gone from all-time highs to a bear market faster than ever before. Unfortunately, bear markets typically need some time to resolve their issues and the duration of this correction is quite short so far.
While many market players are optimistic about fiscal and monetary moves that would prop up the market and the economy, there is still no clarity as to the ultimate impact of the coronavirus. Large public events around the country are being canceled and it is likely that many school closings will follow. Although many moves are being made to contain the virus, no one knows how much it may have spread already.
This continued uncertainty is undercutting the benefits of fiscal and monetary policy. There should be some bounces as the market better discounts the issue but then there will be a long process of calculating the economic fallout.
My main theme recently is that there is no rush to buy longer-term investments. That continues to be the case and it won’t change until there is less volatility and some better price action. Buying into the teeth of a decline in hopes of a bounce is understandable, although it carries way too much risk.
The good thing about bear markets is that they always eventually lead to bull markets. If we navigate well at this point we will be in a good shape to reap the profits when the bulls return home.
Have a good evening, I’ll see you Thursday.
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